Silver Unmasked

Most individuals have no clue about the dynamics of silver, thinking there is an infinite supply of it both above and below ground. But those savvy investors who incorporate commodity based stocks in their portfolios likely own the silver ETF (SLV) or silver miners with a high degree of leverage to the price of silver. The largest of this group include Silver Wheaton (SLW), Pan American Silver (PAAS), Coeur d'Alene Mines (CDE), Silver Standard Resources (SSRI), Hecla Mining (HL). There are also numerous junior and exploration companies that will provide extraordinary returns over the long term.

Silver is often thought to be a metal and little else. It is often assumed that silver is rather cheap due to the lack of scarcity. But both of these assumptions don't reflect the true underlying dynamics.

It is true that silver was mainly used for industrial purposes as well as jewelry, but that fact doesn't hold true today as silver is being used in numerous electronic devices, water filters, piping, batteries, solar panels and more, as this metal has been proven to be extremely versatile. It is highly unlikely it will stop with these uses as more technological uses for silver are discovered. Many of Silver's newly discovered uses are in the preliminary stages of eventually becoming "the gold standard" in such things as the longer lasting and recyclable silver-oxide batteries that are slowly gaining traction in the industry. This should make a huge splash in the battery industry.

Duracell has already developed basic everyday batteries while companies such as Intel (INTC) capital have developed first generation silver-oxide laptop batteries. They obviously recognized the shortcoming of the lithium-ion batteries, as the silver-oxide batteries have a 40% longer battery life, hold their charge (as opposed to lithium-ion batteries which begin to lose their charge after just a few months of use). This will likely be wholeheartedly embraced by big businesses, causing computer manufacturers to replace lithium-ions with silver oxide. Silver is also used as a pipe cleaner as it prevents the bacteria that forms legionnaires' disease from forming. This is and will be increasingly used in water purification systems and pools due to the superior safety profile and the lack of harsh reactions to the skin (as chlorine and bromine have).

Silver lenses have also gained popularity for uses in lenses though that is still in its preliminary phase. It is superior in fighting harmful rays and conducts light in such a way that people don't need to take off their glasses when going into a house. We have the continuously expanding use of silver in semi conductors and alternative energy units such as solar panels. Then of course there are the uses in photography, coinage, etc. This alone warrants a much higher silver price, especially when the supply-demand dynamics are taken into account.

Of all the studies I've read, from the conservative to the extreme, they all had one thing in common: Silver is much more scarce than everyone thinks. A finding from the world gold council two years ago concluded that silver would definitely be the first element on the periodic table to become extinct. They also said this would happen in the year 2020. This is not as crazy as it sounds as it refers to the above ground silver and that which can be mined relatively close to the earth's service. It has been proven that a significant quantity of silver lies deeper in the earth's crust, but due to the uncertainty of this amount, this study only counted above ground and easily accessible silver to be mined.

After reading over half a dozen studies from such groups as those mentioned previously, another conclusion was universally reached. It is that the silver above ground and which can be mined easily is unsustainable, making it necessary to change the way modern mining operates. Mines that require the producer to dig far below the earth's crust will be commonplace in the industry. This holds vast implications to the market prices in the future. It is intuitive that the capital requirements will be many times larger, only making it feasible to engage in these operations with a much higher market price for silver. These estimates range from $30/oz on the conservative side and up to $60/oz for the more aggressive estimates.

Aside from the world inflation that is occurring (as the largest central banks in the world are very active in the race to debase), I don't want to make any forecasts about the future price, but I can say with a reasonable amount of certainty silver will surpass its record high of $50 oz sometime in the coming decade. I can also say the current market price (around $16.75/oz) does not reflect the intrinsic value of this metal. My conservative estimate would be a long term silver price between $25/oz-$30/oz. On one last note, I would weight silver and silver miners more heavily than gold and gold miners in my portfolio as silver has many more catalysts driving the price aside from being an inflationary hedge. Gold has nearly no industrial uses and much of it can and has been recycled, at least in relation to silver which is more often thrown out.

Silver mining is a great unexploited industry (due to the current lack of institutional money and common misunderstanding of this industry by retails investors), that I think will provide incredible returns. Of course this requires patience, but the supply-demand disconnect coupled with an impending wave of inflation, should slingshot this metal to record highs. Silver lacks portability, but silver miners are liquid, leveraged to the price of silver and will likely become income producing assets (Silver Wheaton must start paying a dividend when they can't reinvest cash flows on an economic level).

Disclosure: Long SLW, CDE, SSRI CALLS

Comments

[sdavid0419:]

I think you hit the nail on the head. While gold is considered real money, silver actually is very useful even if photography went digital. With gold the imaginary thing (arbitrage) can work as there is a lot of real gold out there to cover shorts. With silver, it might take a decade but imaginary silver will not be available to cover shorts!

Oct 28 06:50 AM

[mbkelly75:]

Well written and clearly stated, the article is exactly right. Ted Butler has been talking about this for a long time. He has been right all along, but it has been long covered up and is still hidden along with the growing lack of Gold. Your Silver stock suggestions are good ones, but I would not use GLD or SLV except for short-term trades. CEF has a much more transparent way of doing things and allows you to hold both Gold and Silver in one stock. They even pay a VERY small dividend and do the needed re-balancing for you when either one gets to be too much past the 50-50 they try to keep it in.

Oct 28 08:41 AM

[tc1:]

Hi H.I.-- Thank you for another informative article. I've read your cogent pieces on Silver Wheaton (SLW) before, and this one was a useful overview on silver itself with some pertinent insights i'd not seen before....

Oct 28 09:16 AM

[walkwithalimp:]

Likewise, a "fan" from Texas here. Up or down, SLW stays a permanent fixture in a well balanced portfolio. Thanks, H.I. for your helpful insights!

Oct 28 10:14 AM

[sdfsdf:]

All this is well and good. However you must understand that big banks rule the market for these metals and with the support of big government behind them there is a very slim chance that the metal will go up at any parabolic rate. At this stage there is a strong change that these metals encounter a serious pull back short to mid term. In long term your analysis is spot on and dips will be a good place to enter these stocks. I own SLW at much lower cost bases and looking to unload some of it at this time. Also big banks control the SLV and other ETF's so be every careful when buying them for any long period of time.

Oct 28 10:52 AM

[tripleblack:]

Silver is also entering the pharma pipeline (not a new story, but perhaps a new "re-entry").

Oct 28 11:51 AM

[secmaven:]

SIVR is an ETF that holds actual bullion in Switzerland. Unlike SLV It does not trade at a discount to the so called "Spot" price established on the CRIMEX by JPMorgan.

Oct 28 12:09 PM

[ryanb:]

The silver institute has a good breakdown of supply and demand by market/industrial use.

www.silverinstitute.or...

It

Oct 28 12:34 PM

[ryanb:]

The silver institute has a good breakdown of supply and demand by market/industrial use.

www.silverinstitute.or...

It's clear that while production is growing, so is demand. The goverment is selling less silver, which was previously suppressing the value of silver.

Also, if you look at the current supply of industrial grade silver available, we are running only about 4 months ahead of current demand. If silver supplies stopped today and demand remained consistant, we would run out in 4 months.

Oct 28 12:34 PM

[User 83584:]

Interesting article. The

Oct 28 01:23 PM

[User 83584:]

Interesting article. The 'historical high' price of silver shouldn't be used for comparisons. Back in 79-80, the Hunt brothers tried to corner the world silver market. The price was driven up to around $50/oz. when they tried to cover their positions. This market was completely fabricated and not at all tied to supply-demand fundamentals.

Oct 28 01:27 PM

[silverslut:]

Well written article. The major change in the silver equation relates to investment demand. Specifically demand due to loss of confidence in fiat currencies. Sooner or later, silver will be the best performing substitute for paper. Then the whales will find it difficult to jump into the thimble sized pool of the silver market. Those who buy silver now may discover that this is the best moment yet for the whole bull market to date. There are increasing signs that the physical market is about to expose the fraudulent paper market for silver. After 9 years of study, my guess is that a minimum target for silver is $500/oz. Someday soon, your readers will think you are a genius.

Oct 28 02:45 PM

[StateofConf...:]

If you predict something long enough it may come true. The end of the world has been predicted for about 2000 years. The last time was going to be the millineum (was it year 2000 or 2001?).
Right now the world would stop if the US dollar became worthless. Just look at the recent recession. I'm not against owning some silver or gold but if the dollar goes to zero, it better be in a spendable form and you better have it in your back yard. I'm not sure even that will be of much use. Why not just buy a lot of freeze dried food and keep it in the basement. You can also trade food as well as eat it. Coins may be of use for a few other things. Of course life may not be worth living anyway.

Oct 28 10:07 PM

[Hyperinflation:]

It doesn't have to go to 0, assuming it looses 50-75% of its value over the next 10 years due to the massive money printing/deficit spending, silver would go up at a faster pace. Silver has two things going for it, industrial demand ( most of which has only been discovered in the last couple of years- and have yet to become commonplace) and a great inflation hedge.


On Oct 28 10:07 PM StateofConfusion wrote:

> If you predict something long enough it may come true. The end of
> the world has been predicted for about 2000 years. The last time
> was going to be the millineum (was it year 2000 or 2001?).
> Right now the world would stop if the US dollar became worthless.
> Just look at the recent recession. I'm not against owning some silver
> or gold but if the dollar goes to zero, it better be in a spendable
> form and you better have it in your back yard. I'm not sure even
> that will be of much use. Why not just buy a lot of freeze dried
> food and keep it in the basement. You can also trade food as well
> as eat it. Coins may be of use for a few other things. Of course
> life may not be worth living anyway.

Oct 29 12:19 AM

[Hyperinflation:]

Yeh I was just throwing that out there. I think if you are going to own gld, slv or cef, then you might as well own the physical asset. These etfs can have large expense ratios, questionable auditing and can be taxed. When I plan to sell some silver or gold given the right price I would go abroad (Australia) where gains on metal aren't taxed. I have sold gold to dealers here to put into miners or buy silver and there was no ID required, as well as being repatriated in cash. Sure beats the capital gains tax in the U.S


On Oct 28 08:41 AM mbkelly75 wrote:

> Well written and clearly stated, the article is exactly right. Ted
> Butler has been talking about this for a long time. He has been right
> all along, but it has been long covered up and is still hidden along
> with the growing lack of Gold. Your Silver stock suggestions are
> good ones, but I would not use GLD or SLV except for short-term trades.
> CEF has a much more transparent way of doing things and allows you
> to hold both Gold and Silver in one stock. They even pay a VERY small
> dividend and do the needed re-balancing for you when either one gets
> to be too much past the 50-50 they try to keep it in.

Oct 29 01:18 AM

[obuzzardo:]

Why does the "world have to end" for resolution of a long-distorted valuation of something like silver?

It would not be the first time.

There have been many mispriced key commodities that violently sought fair value after some change in the market or government policy.

Oct 29 02:33 AM

[zz773:]

"A finding from the world gold council two years ago concluded that silver would definitely be the first element on the periodic table to become extinct. They also said this would happen in the year 2020."

Do you have the original source for for this? I'd like to see their data. Thanks!

Oct 29 05:23 AM

[kohalakid:]

You failed to explain why SLV trades at a larger discount to spot than SIVR.

You do know, don't you???

And COMEX doesn't set the spot price of silver. COMEX is a FUTURES market. Dealers use COMEX as a reference point for setting the spot price


On Oct 28 12:09 PM secmaven wrote:

> SIVR is an ETF that holds actual bullion in Switzerland. Unlike
> SLV It does not trade at a discount to the so called "Spot" price
> established on the CRIMEX by JPMorgan.

Oct 29 08:28 AM

[swsprime:]

An excellent summary, Hyper. I think Silver has been kept low because it must be seen to linger in the precious metals price frame with Gold - which is manipulated to bolster our fiat currency, the USD.

According to my rough calculations we have NIL world stocks of Silver now if you subtract just a small percentage of the so called Silver ETF Physical stock, because I believe ETFs are not keeping the 100% physical Silver backing they promise, (the same bankers who manipulate the gold price 'hold' all the ETF physical silver - what a sad joke.)

How can you see this?

According to the Morgan Silver Report a post war high point of world silver holdings was 1989. In that year the world had 2200 million oz of silver. Since then the rising costs of mining the stuff and it's poor market price performance compared to Gold has reduced the amount of silver extracted from the ground and world stocks have declined.

Between 1989 and 2005 silver holdings were on a virtual straight line decline of 125 million oz per year as industrial silver usage and jewelry production was not fully replaced by newly mined silver. The low point of world silver holdings was apparently 2005 when we held just 200 million oz of silver.

Then from 2005 to 2009 the world's holdings of Silver suddenly 3x'd, and whereas we only had 200 million oz in 2005, we now appear to have 600 million oz. How come? Silver mining hasn't radically increased output, its’ declined. The price of silver hasn't skyrocketed so that everyone is turning their silver jewelry into scrap silver. Looking at the decline of stocks between 1989 and 2005 and projecting that decline to 2009 we should be sold out of the stuff! So where has all this silver come from? Is this truly Silver Manna from heaven?

Well interestingly enough 2006 is when Silver ETF's started, promising they had all the Silver to back the new paper they were issuing to Silver ETF buyers.

Let me see now, if I'm a marginal banker newly selling silver paper promises and I've got all these people buying my bits of paper saying IOU silver, do I really need to hold all that silver I'm writing paper for? In fiat money banking the bankers only need to hold 10% of the money they lend out because banks lend deposits to each other. Couldn’t ETF's lend deposits to each other, or better still, sell silver IOU paper to each other and then claim the other’s ETF IOU paper is physical silver stock??

Need I say more?

Silver Wheaton (SLW) is my preferred vehicle for Silver Investment.

Oct 29 08:37 AM

[Tetrapod:]

I'm amazed that with all the fundamentals of silver so bullish, that the premiums for physical silver are so low. I've been able to buy 100 oz. silver bars below the spot price, even after commissions, on bulliondirect.com. These same bars were selling at about a $2 / ounce premium a few months back. Last week, they weren't selling, even at an ask of .50 / ounce below spot. Now they're asking .10 below spot, but that's still crazy low in my view.

Oct 29 12:34 PM

[kohalakid:]

swsprime---

If you really believe that world silver stocks were just 200 million ounces in 2005 then you will believe just about anything.

That number defies any type of logical understanding of the silver market.

Oct 29 12:45 PM

[Mark Anthony:]

Describing all the new application of silver is nice. But without quantified data no conclusion can be drew. Global annual silver mine production is about 20,000 metric tons, plus lots of recycling.

I believe from an industrial supply/demand point of view, silver is NOT in deficit. But silver is still way much more bullish than gold, because silver is much more suitable for small investors. We are not quite there yet, as most of the average folks still do not understand the danger of dollar collapse, and do not know to buy precious metal to protect themselves.

The most bullish precious metal, should be palladium. It's bullish on many fronts:

seekingalpha.com/autho...

1.There will be a well documented industrial shortage, as Russian Government palladium stockpile sales, which supplemented the market one to two million ounces each year for almost two decades, has now ended, as the stockpile is depleted. This is HUGE. In 2000/2001 a mere rumor that thy were stopping the stockpile sale drived palladium from $300 to $1100 in a few months.

2. Historically palladium and platinum are traded at similar prices. They two are equally rare, equally expensive to produce, and equally useful.

3. Global palladium mine production is only 6M+ ounces. There is huge opportunity for some big investor to corner the market to rip huge profit from the world's only two primary palladium producers, SWC and PAL.

4. Huge potential for palladium as Cold Fusion is probably human's only real hope to overcome the Peak Oil energy crisis. Cold Fusion rely on palladium.

Invest in palladium by buying the physical metal and buy shares of SWC and PAL. My 401K is 95% in SWC and PAL.

Oct 29 01:16 PM

[TradingHelp...:]

After topping just above $18 and trading in range for two weeks Silver corrected to stall slightly above $16. The first gaining session after five losing ones in a row came in line with the bullish trend that set the tone for the last three months. The Silver market presents the opportunity to open a Long position to take advantage of a fresh round of buying power in an attempt to reach higher highs once again.

www.etoro.com/A8334_TC...

Oct 30 04:20 AM

[Hyperinflation:]

You're right on the money with your supply analysis. I think there will be a slingshot effect because of the following: The much lower supply relative to what the market is pricing in, which has been exacerbated by the fact base metal mining ( of which silver is a large bi-product) took a 1.5 year hiatus during the global economic crisis. When then industrial demand really kicks into high gear it will likely coincide with a dramatic increase in investment demand due to worldwide inflationary pressures, ( as the race to debase has nearly all major central banks participating) . I believe this dramatic rise in investment demand will persist for a prolonged period of time in response to individuals, central banks, economists, other , realize a fiat money system isn't sustainable.

-Silver Wheaton is my favorite and largest silver equity position as well


On Oct 29 08:37 AM swsprime wrote:

> An excellent summary, Hyper. I think Silver has been kept low because
> it must be seen to linger in the precious metals price frame with
> Gold - which is manipulated to bolster our fiat currency, the USD.
>
>
> According to my rough calculations we have NIL world stocks of Silver
> now if you subtract just a small percentage of the so called Silver
> ETF Physical stock, because I believe ETFs are not keeping the 100%
> physical Silver backing they promise, (the same bankers who manipulate
> the gold price 'hold' all the ETF physical silver - what a sad joke.)
>
>
> How can you see this?
>
> According to the Morgan Silver Report a post war high point of world
> silver holdings was 1989. In that year the world had 2200 million
> oz of silver. Since then the rising costs of mining the stuff and
> it's poor market price performance compared to Gold has reduced the
> amount of silver extracted from the ground and world stocks have
> declined.
>
> Between 1989 and 2005 silver holdings were on a virtual straight
> line decline of 125 million oz per year as industrial silver usage
> and jewelry production was not fully replaced by newly mined silver.
> The low point of world silver holdings was apparently 2005 when we
> held just 200 million oz of silver.
>
> Then from 2005 to 2009 the world's holdings of Silver suddenly 3x'd,
> and whereas we only had 200 million oz in 2005, we now appear to
> have 600 million oz. How come? Silver mining hasn't radically increased
> output, its’ declined. The price of silver hasn't skyrocketed so
> that everyone is turning their silver jewelry into scrap silver.
> Looking at the decline of stocks between 1989 and 2005 and projecting
> that decline to 2009 we should be sold out of the stuff! So where
> has all this silver come from? Is this truly Silver Manna from heaven?
>
>
> Well interestingly enough 2006 is when Silver ETF's started, promising
> they had all the Silver to back the new paper they were issuing to
> Silver ETF buyers.
>
> Let me see now, if I'm a marginal banker newly selling silver paper
> promises and I've got all these people buying my bits of paper saying
> IOU silver, do I really need to hold all that silver I'm writing
> paper for? In fiat money banking the bankers only need to hold 10%
> of the money they lend out because banks lend deposits to each other.
> Couldn’t ETF's lend deposits to each other, or better still, sell
> silver IOU paper to each other and then claim the other’s ETF IOU
> paper is physical silver stock??
>
> Need I say more?
>
> Silver Wheaton (SLW) is my preferred vehicle for Silver Investment.

Nov 01 10:19 PM

[Hyperinflation:]

That's true, and oh boy could the hunt brothers have made an enormous profit had they liquidated their positions in time. But you can also take the record gold price back then $850 and use historical ratios to see what the range would have been w/o the impact of the hunt brothers. Using a 30-45:1 ratio, silver would have been somewhere between 19 - 28/oz.


On Oct 28 01:27 PM User 83584 wrote:

> Interesting article. The 'historical high' price of silver shouldn't
> be used for comparisons. Back in 79-80, the Hunt brothers tried
> to corner the world silver market. The price was driven up to around
> $50/oz. when they tried to cover their positions. This market was
> completely fabricated and not at all tied to supply-demand fundamentals.

Nov 03 10:19 PM

[Austrian Ec...:]

Silver More attractive than Gold says Jim Rogers on Gold Seek Radio Nugget Nov 03 2009
jimrogers1.blogspot.co...

Nov 05 09:17 AM

[Jackiebear:]

I just read the SIVR Prospectus and it clearly states that the physical silver is held in vaults in London. Has their been a change to Switzerland?


On Oct 28 12:09 PM secmaven wrote:

> SIVR is an ETF that holds actual bullion in Switzerland. Unlike SLV
> It does not trade at a discount to the so called "Spot" price established
> on the CRIMEX by JPMorgan.

Nov 05 08:48 PM